What is a Settlement Agreement?

A settlement agreement is used to resolve or avoid legal disputes between an employer and employee, typically involving the individual waiving their legal rights in the termination of employment on mutual terms.

Settlement agreements may be proposed before undertaking any formal action. Once it has been proposed, 10 days - at least - should be given to consider the request and terms included within it.

If meetings are agreed upon to discuss the terms of a settlement agreement, employers should allow employees to be accompanied by a trade union official, representative or work colleague. However, this is not a legal requirement.

In order to be a valid and binding settlement agreement, specific criteria must first be satisfied:

• The agreement must be in writing
• It must relate to a particular complaint and or proceedings
• The employee or worker must have received advice from a relevant independent adviser as to the terms and effect of the proposed agreement and, in particular, as to its effect on their ability to pursue their rights before a tribunal
• There must be in force, at the time the adviser gives that advice, relevant insurance covering the risk of a claim by the employee or worker in respect of loss arising as a result of the advice
• The agreement must identify the legal adviser
• The agreement must state that the conditions regulating settlement agreements under the relevant statutory provisions (which should be identified) have been satisfied

However, it must be noted that there are some claims that cannot be settled using a settlement agreement. This includes claims under The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) and for failure to notify liability information. This is intended to protect claimants and implement adequate safeguards to prevent unfair practices by employers who may attempt to engage employees into signing away their rights.

Why settlement agreements might be used.

This is often done to avoid the cost, time and uncertainty involved in an employment tribunal.

Cost effective – Settlement agreements often cost less than going through the tribunal system due to the complexity. Furthermore, as it is often more time consuming to go to a tribunal, this increases the legal costs due to the additional representation and procedures.

Time Consuming – Settlement agreements can often result in a quick resolution if both parties can agree on the terms. However, even if there are multiple meetings and considerations involved, these often require less time than the procedures required by the tribunal process. For employees, in a settlement agreement, the employer generally pays or contributes to the legal fees.

Uncertainty – In an employment tribunal, the employee and employer do not have the same opportunity to agree on mutual terms of the termination of employment and the tribunal has more control.